Westpac says credit availability may reduce

RossKelly

SYDNEY (MarketWatch) -- Westpac Banking Corp. (WBC.AU) warned Wednesday that Europe's debt woes will continue to impact the price and possibly even the availability of credit to Australia's banking sector.

The resource-rich nation's second biggest bank by market value, however, expressed confidence in Australia's outlook, partly owing to its connection to fast-growing Asian economies and the flexibility of its central bank to cut interest rates further if necessary.

Although growth in the Chinese economy is still strong and the U.S. is showing signs of slow improvement, people in Europe face an uncertain period as leaders deal with a debt challenge that has no easy answer, Chief Executive Gail Kelly said in speech notes for the bank's annual shareholder meeting.

"Similar to the global financial crisis, the problems in Europe are reverberating around the globe with growth slowing, increased financial market volatility and heightened consumer and business uncertainty," Kelly said.

But she added that Australia "is in a strong position" because it hasn't gorged on debt like some other developed nations and has a strong banking sector that's well regulated.

"We are further supported with significant monetary policy flexibility," Kelly said, referring to the fact that Australia's central bank has wriggle room because the nation's cash rate stands at 4.25% compared to rates at next to nothing in other developed countries.

Still, Australia's banks rely heavily on offshore wholesale funding to finance their loan books and the European woes have made that capital more expensive. Australia's banks haven't always passed cuts in official interest rates fully onto their customers and Kelly wouldn't rule out similar unpopular moves.

"Higher funding costs are a reality of this environment and are continuing to place pressure on interest margins," she said. "We are very mindful of the impacts of interest rate decisions on customers but these must be balanced with what is economically responsible."

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